Winning the insurance game

Costs: Premiums are rising for homeowner's coverage, but policyholders can take prudent steps.

August 25, 2002|By Adele Evans | Adele Evans,SPECIAL TO THE SUN

Two years ago, Maryland Insurance Commissioner Steven B. Larsen bundled his auto and homeowner's coverage under one insurance company. The resulting "multipolicy discount" was a good way for him to consolidate accounts and save money. Then he added a liability policy with coverage that went beyond the limits of his basic homeowner's policy.

Such creativity could be the key to surviving a difficult cycle in the homeowner's market, insurance officials say. Careful shopping, using the same company for more than one type of insurance and raising policy deductibles can be critical in obtaining new policies in the coming year.

"The market has changed quite a bit from two to three years ago," Larsen said. "During the '90s and into 2000, premiums were stable. There were many carriers. Then, a lot of factors came together and changed the landscape."

The insurance industry calls that "landscape" "The Perfect Storm." The storm began brewing two years ago and continued through last year. It included the terrorist attacks of Sept. 11, claims resulting from catastrophic weather, mold-damage payouts and general investment losses. The result was property and casualty underwriting losses of $53 billion.

For homeowner's insurance, which is in the property-casualty category, last year resulted in losses and expenses exceeding premiums by $8.9 billion, or $1.18 in losses and expenses for every $1 earned. It was one of the worst years on record.

For the homeowner, who pays an average of $500 a year for coverage, those losses will mean an increase in premiums of 8 percent to 9 percent, stricter underwriting requirements, lower insurance payouts and fewer companies from which to choose, especially for first-time buyers. Older homes might be harder to insure because they pose bigger risks to insurers.

"There's slow business all over," said Donald Thompson, an Allstate Insurance Co. agent based in Phoenix. "Some companies have stopped writing here. ... It's cyclical. They call it a hard market now. It's tied to investments and profits, stocks. And in some states it's tough to do business. There are a lot of anti-insurance laws."

"The costs of catastrophic claims are way up. Companies are looking at whether or not they can take on more risk," said Jeanne Salvatore, vice president of consumer affairs at the Insurance Information Institute, a major property-casualty association based in New York.

Larsen said many companies doing business in Maryland are requesting double-digit rate increases to cope with the unexpected losses. And State Farm, Farmers, Harford Mutual and Safeco insurance companies have suspended writing new homeowner's policies in Maryland and several other states.

The insurance department is reviewing those decisions, Larsen said, adding, "One reason they said they aren't writing new business is that they need to be able to profit. They can't take on new business at low rates, but if they raise the rates too much, they'll lose their existing customers."

The companies say the insurance climate makes it too hard to take on new business. "We've written so much business and grown so fast in the last few years ... and that's not always a good thing for insurers," said Angela Mitchell, spokeswoman for State Farm. "New insurance customers are more likely to have claims, and over-rapid growth can increase expenses."

What is homeowner's?

Homeowner's insurance protects the policyholder from financial disaster if his house is damaged by "perils" such as fire, water, hail, lightning, theft or lawsuits resulting from an injury on the property. Coverage comes in two basic forms, insurance on the structure only and coverage for the house and the valuables inside.

The basic policy, usually the only one required by lenders, covers only the house. It's often called fire insurance or hazard insurance. The policy is written to cover only the replacement cost of the house at the time it is damaged or destroyed. It does not include valuables inside the house. Basically, the hazard policy protects the lender from losing its investment in the house.

"We're concerned that they have coverage for the house's value, so that we're covered from a mortgage standpoint," said longtime mortgage official Al Ingraham, a branch manager at First Horizon Home Loan Corp. Even so, lenders, insurance agents and brokers urge homebuyers to investigate getting more coverage.

Most homeowners pay for additional coverage to replace valuables such as jewelry, art, satellite dishes, computers, furniture and expensive collections.

"Today's policies are designed to cover anything an owner can encounter," Thompson said. "Replacement insurance is so cheap, and it covers everything but the dwelling. It's a good deal. You aren't wiped out."

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